457 plan

These retirement plans are based on section 457(b) of the Internal Revenue Code (IRC) – hence the name – which was created with the passage of the Revenue Act on November 6, 1978, and originally applied only to state and local government employers. The Tax Reform Act of 1986 extended IRC 457 to apply to tax-exempt entities.

457 plan questions

From the types of 457 plans to contribution and minimum distribution requirements, you might have a lot of questions about 457 plans. Here are answers to some of the most common 457 plan questions.

What is a 457 plan?

457 plans fall into two categories: governmental 457(b) plans and “top hat” 457 plans.

1. Governmental 457(b) plans can be offered by state and local governments and public schools, and all employees who meet the plan’s eligibility criteria can typically participate. Governmental 457(b) plans must comply with the IRS annual contribution limits, and both employees and employers can make contributions.
2. Unlike governmental plans, top hat plans are only made available to a select group of managers or highly compensated employees and usually by tax-exempt organizations, such as nonprofit hospitals and charities. Additionally, assets in top hat plans are owned by the employer until distributed and, as a result, are subject to the credit risk of the employer while in the plan. There are two types of top hat 457 plans:
   • Tax-exempt 457(b) plans must comply with the IRS annual contribution limits, and both employees and employers can make contributions.
   • 457(f) plans are not subject to the IRS annual contribution limits, but only employers can make contributions. These plans are typically offered as an additional perk in recruitment efforts to further entice potential executives and are often tied to performance goals or length of service requirements. As such, benefits under these plans may be subject to forfeiture if performance goals or other stipulations are not met.

It’s important to note that while all these plans are called 457, the provisions for each plan type vary widely. Our focus here is the Governmental 457(b) plan since it’s the most common among those mentioned.

How does a Governmental 457(b) plan work?

457(b) plans work like many other retirement plans. Employees who enroll in the plan can contribute a percentage of their income up to the annual contribution limit. Depending on the type of contribution you make (see below for more details), you can receive a tax benefit when you contribute or when you take a withdrawal from the plan. However, unlike other employer retirement plans, the annual contribution limit for governmental 457(b) plans applies to contributions from both the employee and the employer.

You can invest your assets among the investment choices offered by your plan. The dollars you contribute and the earnings on those dollars belong to you – your employer must keep these assets separate from their own and cannot use them for any other purpose. The dollars your employer contributes (and the earnings on those dollars) must be kept separate for your benefit as well, but you may forfeit these assets if you leave your employer before they’re vested. Vesting schedules (or in other words, the amount of time you have to stay with your employer to keep the employer contributions) are defined by each plan.

How much can I contribute to my Governmental 457(b) plan?

You can contribute up to 100% of your includible compensation or the annual contribution limit, whichever is less. Generally, includible compensation is any compensation from your employer that’s included in your gross income when you file your taxes. The annual contribution limit for 2024 is $23,000.

Additionally, your Governmental 457(b) plan may offer two types of catch-up contributions to eligible participants:

• Age-based catch-up: If you’re 50 or older, you can contribute an additional $7,500 for a total of $30,500 in 2024.
• Service-based catch-up:  If you are in the last three years prior to normal retirement age (as defined by your plan), you can contribute up to two times the annual contribution limit ($46,000 in 2024). Since a special calculation is required to determine the how much you’re eligible to contribute with this type of catch-up, you may want to consult with a tax professional.

If your plan offers both catch-up options, you cannot use both in the same year – you get the higher of the two.

Keep in mind that your employer’s contributions count toward your contribution limit. For example, if your employer contributes $4,500, the maximum amount you can contribute in 2024 is $18,500 (plus catch-up contributions if eligible).

Do I receive a tax benefit when I contribute to a Governmental 457(b) plan?

With pretax contributions, you defer taxes on your contribution and earnings until you take a distribution from the plan.

Roth contributions are made with after-tax dollars, so you do not receive a tax benefit when you make the contribution. However, earnings and distributions of Roth dollars are generally tax-free in retirement.

What are the rules around withdrawing funds from a Governmental 457(b) plan?

Typically, you may only take a distribution from a Governmental 457(b) plan when a specific triggering event occurs, such as:

• Separation from service (employment)
• Attainment of age 70½
• Plan termination (all participants/employees become 100% vested)
• Divorce when a qualified domestic relations order (QDRO) is issued

Depending upon the terms of your plan, it may be possible to take a distribution:

• For unforeseeable emergencies
• Once you’re 59½ or older
• For a qualified birth or adoption (up to $5,000 per birth/adoption per taxpayer)
• Of account balances less than $5,000 (excluding rollover dollars) if you have not actively contributed to the plan for two years

Are there required minimum distributions (RMDs) from a Governmental 457(b) plan?

Generally, you must begin taking a required minimum distribution (RMD) from your plan by April 1 following the year you turn age 73 and by December 31 each subsequent year. If you are still working for the employer sponsoring the plan, you may delay your RMDs until April 1 of the year following retirement if the option is available in your plan.

Additionally, RMDs are not required for your Roth 457(b), starting in 2024.

How are Governmental 457(b) withdrawals/distributions taxed?

Determining what’s taxable when taking a distribution from a Governmental 457(b) depends on what type of money you have in the plan. Of course, eligible rollovers to an IRA are not subject to taxation. 

• Pretax money – Any distribution not rolled over will be taxed as ordinary income. Unlike other employer retirement plans, distributions from a Governmental 457(b) are not subject to an early withdrawal penalty, regardless of your age. If you are younger than 59½, it may be beneficial to leave assets in your 457(b) if you expect to take a distribution before reaching 59½.
• Roth money – Qualified distributions of Roth contributions and earnings can be taken tax free.

Can I participate in another employer-sponsored retirement plan if I already participate in a Governmental 457(b) plan?

When an individual participates in more than one salary deferral plan, their employee salary deferral contributions to all plans are usually limited to the IRC 402(g) limit, which is $23,00 in 2024. 

However, 457 plans are not subject to the 402(g) limit. This allows you to participate in a 457 plan in addition to another salary deferral plan and contribute up to the salary deferral limit in each plan. For this reason, some public school districts offer Governmental 457(b) plans in addition to a 403(b) or 401(k) plan to allow employees to take advantage of the contribution limits in both plans, potentially doubling their salary deferral contributions.

I have access to multiple types of employer retirement plans. What are the differences between a Governmental 457(b) plan, 401(k) and 403(b) plan?

Some of the biggest differences between Governmental 457(b) plans and 401(k)/403(b) plans are: 

• 401(k) plans are not available to state or local governments unless they were adopted before May 5, 1986. 403(b) plans are also not offered to government employees – just public education employees and employees of 501(c)(3) organizations.
• A Governmental 457(b) plan may allow independent contractors (not just employees, as is the case with other plans) who perform services for the employer to participate.
• The contribution limit for a Governmental 457(b) plan includes employer and employee contributions, whereas the contribution limit for 401(k)/403(b) plans includes employee contributions only.
• A Governmental 457(b) plan’s service-based catch-up contribution (if offered by the plan) is double the annual contribution limit for the last three years prior to reaching normal retirement age (as defined by the plan). 401(k) plans do not offer a service-based catch-up contribution (only age-based catch-up contributions). 403(b) plans may offer a service-based catch-up contribution of up to $3,000 for five years to individuals with 15 or more years of service. Unlike Governmental 457(b) plans, participants in 403(b) plans may use the service-based catch-up contribution and age-based catch-up contribution in the same year.
• No early withdrawal penalty applies if you take a withdrawal/distribution before age 59½ from a Governmental 457(b) plan. If you take a withdrawal before age 59½ from a 401(k)/403(b) plan, a 10% early withdrawal penalty will apply unless you qualify for a penalty exception.

Have more questions about 457 plans?

Our financial advisors will work closely with you to evaluate all the retirement options available to you. We invite you to meet with an Edward Jones financial advisor and get started today. Contact us to request a complimentary, no-obligation consultation.